Time To Salvage Nest-egg Losses Is Running Out

August 4, 2002|By Kathy M. Kristof Business Correspondent

Workers nearing retirement age who have watched their nest eggs crack under the weight of a 2-year bear market need to act quickly and decisively if they want to salvage a little glitter for their golden years.

Even if the stock market recovers from its worst swoon in a generation, there's not enough time for those within five years of retirement to regain the 30 percent to 40 percent losses that many portfolios suffered.

Instead of hoping for salvation from the stock market, near-retirees need to focus on things they can do that could significantly improve their retirement prospects: spending less, saving more, working longer or part time and securing an income stream over the long haul.

Here's the game plan:

Assess your position: First, find out whether the bear market derailed your retirement. Take a look at what you intend to spend after you retire and how much will be covered by Social Security and a defined benefit pension -- if you have one. Whatever isn't paid by those sources must come from your own savings and investments.

If Social Security and pension payments will cover the bulk of your expenses, allowing you to withdraw no more than 2 percent to 4 percent of your retirement savings each year, you're still fine, said Mark Brown, partner with Denver investment and financial planning firm Brown & Tedstrom Inc. But if you will need to drain more than 6 percent of your savings each year, something has to give, he said.

"Some people may have lost 30 percent of their portfolio in the past two years, but they're not in trouble. They just have less cushion," Brown said. "Others are in a `spend less' or `work longer' situation."

Those who don't know how much of a gap they'll have between retirement savings and retirement income need to draw up a retirement budget.

On one side of the ledger, list estimated expenses including mortgages, car payments, income taxes, food, utilities and entertainment costs. On the other side, list regular sources of income, such as employer-provided pensions, Social Security, rental income and trust fund payments.

If the expenses exceed your expected income, the gap must be filled by your retirement savings.

Plan to spend less: Those who withdraw 6 percent or more of their savings each year face the very real prospect of running through their savings before they die, and they need to make adjustments, Brown said.

Fortunately, workers who are nearing retirement typically are in a good position to make these adjustments, said Ellen Hoffman, author of The Retirement Catch-Up Guide. The five-year period before retirement is when people usually earn the most and have the lowest fixed expenses. Most of life's biggest costs -- buying a home, raising children and sending them to college -- are taken care of, and disposable income rises accordingly.

In better days, those approaching retirement often used that money to ramp up their lifestyle -- traveling more and buying nicer cars and vacation homes.

But those who aren't well prepared for retirement would be better off reducing their spending and using the extra cash to aggressively pay off debts, including credit cards, car loans and even mortgages, Brown said.

For each $50 cut in monthly spending, you reduce your savings needs by about $10,000, assuming you'll need retirement income for roughly 30 years.

Specifically, assuming a 5 percent rate of return in retirement, someone who needs $2,000 in monthly income from their savings needs a nest egg worth $372,563. If this person needs just $1,950 monthly, $363,249 in savings would be sufficient.

Save more: Lower spending also means you have more money to save. And the federal government recently made it possible for individuals to put more money into tax-deductible retirement accounts than ever before.

Those 50 and older can contribute $12,000 annually to a 401(k), 403(b) or 457 retirement plan. Many individuals also may contribute as much as $3,500 annually to a Roth IRA, which doesn't provide upfront tax deductions but provides tax-free income in the future.

Even at today's low interest rates, a couple saving the maximum amounts in both work-based and Roth IRA accounts each year could stockpile $167,000 over the next five years. That assumes they earn just 3 percent on their money and each contributes $1,291.67 to savings each month -- the maximum allowable.

Work longer: The most common advice planners give to those unprepared for retirement is to continue working, said Ellen Boling, a director in Deloitte & Touche's financial planning practice.

There are three reasons to work longer: You're not draining your savings, so they can keep earning investment returns. You'll be able to add to those savings. And by delaying retirement, you shorten the time that your savings need to last.